Between secure savings and discreet tax advantages: why life insurance is gaining appeal in Luxembourg.
by Ben Guedes and Baptiste Courson
Source: Stock Picture
This article was originally written in French and translated to english with the help of AI. For the original version, please click on this link.
Between secure savings and discreet tax advantages: why life insurance appeals in Luxembourg
When we talk about Luxembourg’s financial centre, we immediately think of investment funds, an attractive tax environment for companies, international banks, or its major role in cross-border wealth management. Yet behind these major financial activities, often associated with large companies and institutional investors, we sometimes forget a dimension that is much closer to the daily lives of households: savings.
Alongside traditional savings accounts, whose interest may sometimes be subject to a relatively high withholding tax, other instruments exist to grow one’s wealth. Among them, mixed life insurance holds a particular place. At the crossroads of savings and protection, this product combines legal security with potential tax advantages, making it, in Luxembourg, a particularly attractive wealth management tool.
In France, life insurance is regularly described as the preferred investment product of the French. Luxembourg enjoys similar popularity for this type of savings product. Indeed, the 2024 financial year shows that, with more than 380 billion euros in total balance sheets, the share attributable to life insurance amounted to 254.3 billion euros. In terms of premium income, “life” activities, meaning activities linked to all types of life insurance contracts, represented 46.4%.
Thus, the total balance sheets of companies governed by Luxembourg law, excluding branches established in Luxembourg, increased by 8.6% during the 2024 financial year. As regards life insurance results, profits after tax increased by 6.9%, rising from 351.9 million euros in 2023 to 376.1 million euros in 2024. Of this 2024 result, 276.8 million euros were attributable to companies governed by Luxembourg law and 99.2 million euros to branches established in Luxembourg.
A contract with two objectives: security and savings
A mixed life insurance policy is a contract that combines a savings operation with a protection operation. Indeed, the insurer pays out capital either to the beneficiary of the contract if the insured person dies, through the mechanism of a stipulation for the benefit of a third party, or to the insured person if they are still alive on a given date. It is in this second scenario that a mixed life insurance contract differs from an “ordinary” life insurance contract, which does not provide for such payment if the insured person survives. This type of contract therefore makes it possible to combine the functions of death insurance and savings for life in the event that the contract is settled through the survival of the beneficiary. The longer the duration of the contract, the greater the effect of capitalisation through the accumulation of interest.
A mixed life insurance policy can be understood as a contract that brings together two objectives in one single product: saving and protection. Throughout the duration of the contract, the person pays premiums that gradually build up capital. At the end of the contract, two situations are possible. Either the insured person dies before maturity, in which case the capital is paid to the beneficiary they have designated. This payment is made through a legal mechanism called a stipulation for the benefit of a third party, which allows a contract to directly benefit another person. Or, on the contrary, the insured person is still alive on the agreed date, in which case they receive the accumulated capital themselves.
It is precisely this double possibility that distinguishes mixed life insurance from a classic life insurance policy: it does not only serve to protect relatives in the event of death, but also to build savings for the future. Over time, these savings may grow thanks to the interest generated by the invested amounts. Therefore, the longer the contract lasts, the more the effect of capitalisation works in favour of the saver and allows the capital to develop gradually.
To illustrate simply how mixed life insurance works, imagine that a person pays 200 euros per month for 20 years into such a contract. Over time, these payments accumulate and generate interest, allowing the capital to grow progressively.
At the maturity of the contract, if the insured person is still alive, they receive the accumulated capital, which could, for example, amount to 60,000 euros including interest. However, if they die before the end of the contract, for example after 10 years, the agreed capital is paid to the beneficiaries they designated.
Savings under strong protection: behind the scenes of the Luxembourg model
In Luxembourg, life insurance contracts benefit from a specific protection mechanism known as the security triangle. This system aims to protect policyholders and beneficiaries by ensuring that the money intended to cover the insurer’s commitments remains separate from the insurer’s own financial resources.
In practical terms, an insurer selling insurance contracts must establish what are known as technical provisions. These are sums intended to cover the amounts that the insurer will one day have to pay to insured persons or their beneficiaries. To ensure the security of these funds, Luxembourg law requires them to be deposited with an approved custodian bank. This bank holds the assets representing these provisions, but may not freely dispose of them.
The system is based on a relationship between three actors, formalised through a tripartite agreement: the insurer, the custodian bank and the supervisory authority, the Commissariat aux Assurances, or CAA. The insurer must deposit the assets corresponding to its commitments with the custodian bank, while the regulator oversees the entire system and ensures that the rules are respected. This organisation forms what is known as the “security triangle”. An essential element of this mechanism is the legal separation of assets. The funds deposited with the custodian bank are separate from the insurer’s own assets. In other words, they are reserved exclusively for the fulfilment of obligations towards policyholders and beneficiaries.
Luxembourg law further strengthens this protection by granting policyholders a priority right, commonly referred to as a “super-privilege”, in the event of the insurer’s insolvency. This means that if the insurer faces financial difficulties, insured persons and beneficiaries have priority in recovering the sums owed to them from the assets deposited with the bank.
Finally, the supervisory authority may, if necessary, block these assets in order to prevent any inappropriate use of them. Such a measure aims to ensure that the funds remain available to honour commitments towards all insured persons and that they are treated fairly.
Thus, the security triangle constitutes a central legal mechanism in Luxembourg insurance law: it organises the separation of assets, supervision by the public authority and the priority granted to insured persons, in order to strengthen the protection of those who have entrusted their savings through an insurance contract. As a result, this mechanism helps provide mixed life insurance contracts in Luxembourg with a particularly high level of protection, thereby reinforcing the attractiveness of this type of contract as a savings instrument.
The tax advantages of life insurance: an opportunity… under conditions
Beyond its savings function, a life insurance contract also offers a tax advantage resulting from Article 111 of the amended law of 4 December 1967 on income tax. Indeed, this article qualifies premiums paid under insurance policies in the event of life or death to insurance companies approved in any Member State of the European Union as special expenses deductible from net income. However, this advantage does not apply without conditions or exceptions.
Excluded are premiums and contributions paid under a life insurance contract that has a direct or indirect economic link with the granting of a loan. In other words, taking out a loan in order to pay the premium, whether directly or indirectly, is not to be considered a special expense. Therefore, the resources allocated to the payment of premiums must come from the taxpayer’s available income or wealth. There is a direct relationship where the taxpayer borrows at the time of, and for the purpose of, paying the insurance premium. An indirect relationship exists where the taxpayer uses their own resources to pay the premium, but must also incur debt to offset the loss of resources resulting from the payment of the insurance premium. Nevertheless, two specific situations allow the deductibility of these premiums to be maintained, even where such a link with a loan exists.
First, where a life insurance contract was taken out more than five years before the granting of the loan and the premiums or contributions continue to be paid under equal conditions and according to a periodicity consistent with the provisions of the original contract, meaning the provisions of the contract as they existed before any amendment introduced by endorsement. Second, where the life insurance contract is taken out in order to secure the repayment of a loan granted for the acquisition of an asset.
As regards contracts that provide benefits in the event of life, only premiums and contributions paid under contracts with a duration of at least ten years are deductible as special expenses. In this specific case of life insurance contracts, the amount of these premiums and contributions corresponds to an actuarial calculation based on the life-related factors of the insured person. This refers to a calculation based on scientific data resting on personal and essential characteristics. Thus, this calculation may only be based, for example, on longevity, the risk of death, age, or the state of health of the same person who has taken out a life insurance contract.
In the case of life insurance contracts aimed at savings and linked to an asset accumulation vehicle, the effective duration of the contract in question must be at least ten years. What is meant here are life insurance contracts under which the capital is paid to the insured person when they are still alive at the end of the contract term. In addition, these same contracts must also be backed by legal vehicles for financial investment, such as a unit-linked life insurance contract.
In addition to life insurance contracts aimed at savings and linked to an asset accumulation vehicle, two further non-cumulative conditions apply. Either they must guarantee death coverage amounting to at least 60% of the sum of all premiums normally scheduled until the end of the contract. The contract must also provide for at least five annual premiums. Or these contracts must provide coverage of at least 130% of all premiums and contributions paid up until the death of the policyholder.
The question then arises as to the amount of premiums and contributions that are legally deductible per year. In this respect, two points must be taken into account.
First, it is possible to take into account all premiums and contributions covering the taxpayer’s risks and forming their savings, but also those, understood here as risks, of their spouse, partner, or children for whom the taxpayer obtains a child tax allowance. This prevents, in particular, any combination of insurance on the life of a third party, meaning any person who cannot be characterised as a spouse, partner, or child. It should be noted that collective taxation and a specific status of the savings beneficiary are not required in order to benefit from the deduction of premiums linked to the coverage of the risks of a spouse, partner, or child. Nevertheless, only the policyholder whose insurance covers their own risks and those of the persons mentioned may deduct the related premiums as special expenses.
Second, Article 109 of the same law provides for a legal ceiling on the maximum amount of premiums and contributions deductible as special expenses over a one-year period. This ceiling is set at 672 euros.
Key takeaway
Ultimately, mixed life insurance appears to be much more than a simple financial product: it embodies a true balance between foresight and the construction of a secure future. Behind legal mechanisms that may sometimes seem complex lies a simple and accessible idea: setting money aside today to protect oneself tomorrow, while also offering security to one’s loved ones.
What makes this type of contract particularly attractive in Luxembourg is not only its ability to grow savings, but also the solid environment that surrounds it. Between the high level of protection offered by the security triangle and the tax advantages governed by law, the saver benefits from a framework that is both secure and advantageous.
Thus, mixed life insurance fits fully within the logic of Luxembourg’s financial centre: efficient, regulated and oriented towards the long term. For individuals, it represents a concrete entry point into thoughtful wealth management, combining prudence, opportunity and a vision for the future.
Disclaimer: The information presented in this article is intended solely for general informational purposes and should not be interpreted as legal advice. Laws and regulations may change over time, and the information provided may not reflect the most recent legal updates or be suitable for your individual circumstances. You should consult a qualified legal professional before making decisions or taking action based on this information. The author and publisher assume no responsibility for any inaccuracies, omissions, or outcomes resulting from the use of this content.
